October baseball is here, where the best of the best teams in Major League Baseball duel it out to be crowned champion of the world for another year. And while there will be history made, exciting walkoffs, and bitter disappointment (sorry, Blue Jays fans), one thing is and has always been true – hitting a baseball is one of the most difficult things to do in all of sports. In fact, some call hitting a ball “superhuman.” And while it might seem like an art form, hitting is actually more of a science. Take it from the most proficient hitter in the history of baseball, Ted Williams.
Whether or not you have heard of Ted Williams, one thing you need to know about him is that in 1941, he put together one of the best batting averages of all time – and one that has not been matched since. He hit 0.406 that year, that’s more than 4 out of every 10 at-bats, not even counting any walks. He was and still is regarded as the best hitter of all time.
So, how did he do it? And what can we learn from him, and apply to investing?
Ted Williams did one thing that no other player was doing at the time. He analyzed hitting as a science, and broke down the batter's box into 77 sections, 11 down and 7 across, all the size of a baseball.
Once he deconstructed the batter's box, he discovered something that is commonplace knowledge today. On pitches that were near the middle of the box, he tended to have the highest batting average. That’s what we term today as the “sweet spot” of hitting. He was still pretty remarkable hitting in the other sectors, but what he understood was that to be the best hitter, he didn’t need to have the best swing or be the strongest, he simply had to be patient. Williams waited for pitchers to throw him a baseball right in the sweet spot, and take those pitches as an opportunity to get on base.
Of course, in baseball, you only get so many pitches per at-bat. However, to maximize your batting average, you’re better off waiting for the fat pitch down the middle then taking your chances at something on the outside, even if it’s close to what you’re looking for.
The Circle of Competence
This analogy of a batter’s hitting matrix directly correlates to a concept we preach, and that is staying within our circle of competence when it comes to investing.
This way of investing was made famous by legendary investor Warren Buffett, who explained that:
“What an investor needs is the ability to correctly evaluate selected businesses. Note that word ‘selected’: You don’t have to be an expert on every company, or even many. You only have to be able to evaluate companies within your circle of competence.”
What does that circle of competence remind you of? The sweet spot in Ted William’s hitting matrix.
That’s exactly what we’re trying to accomplish when we study securities. We don’t want to profess that we have a massive area of expertise, and try to analyze every stock and opportunity out there. We want to stay within our circle of competence, our “sweet spot,” and wait for the correct opportunity to come along. There will be a ton of pitches coming our way every day, week, month, and year, but if we concentrate on our sweet spot ideas and investments, we’ll end up with the highest batting average we can possibly muster.
Markets today have been volatile, to say the least. The US and Canada have been mired in a bear market, struggling to find footing in this new inflationary era with central bankers putting on a tightening cycle like we haven’t seen before (the fastest from the bottom ever, in the US):
Source: Visual Capitalist
That type of market structure is giving huge problems to high-flying tech companies, whose valuations are determined more by future cash flows than what they are producing now, as capital and investment are becoming much more expensive. Inflation is wreaking havoc in certain sectors, and the possibility of a global recession is at its highest point since the Great Financial Crisis, with many economists predicting one in the next 6 to 12 months.
What this means is we’re starting to see a lot of pitches. As our “sweet spot” company valuations start to come into their opportunity zone, it is becoming clear that taking a swing or two might be an excellent option for long-term investors.
Of course, there are such things as value traps. What we might think is a fastball down the pipe, might be a late-breaking slider to the outside. Should we take that swing before we are confident, we could be made to look more like Mario Mendoza (who failed to reach a 0.200 batting average in his nine seasons of hitting, creating the “Mendoza Line” of batting averages). We want to be Williams, not Mendoza.
The biggest difference between baseball and investing, is that we’re not on a pitch count. We don’t have to swing before 3 strikes or 4 balls blow past us at 95 mph (150 kph). If we think a curveball, slider, or knuckleball is coming, we can simply take the pitch and wait for the next one. When looking for investments for our portfolios and our clients, we want to be in a hitter’s count, sitting on a fastball, right down the pipe. And when that pitch comes, we want to swing for the fences.
Investing, like in baseball, is not easy in this environment. You might have the best team, with the best hitters and the best pitchers on paper. You might think you have the perfect stock to hit, and it might slide out some poor earnings or guidance on you when you least expect it. The important thing to remember is to stick with your game, wait for the right opportunities, and don’t hesitate when everything lines up.
For the Blue Jays, there’s always next year. For our clients, we have a 5, 10, and 20-year plan of attack.
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